Before Taking a Reverse Mortgage You Need to Know the Costs
More and more seniors are turning to reverse mortgages to supplement their retirement income. If you are considering making this move, you need to understand some of the options and all of the initial and recurring costs associated with them.
Most reverse mortgages are offered through the
Aside from interest, there are three basic costs associated with a reverse mortgage: an origination fee, mortgage insurance costs and closing costs. The entire amount of these fees may be financed as part of the mortgage. The origination fee is 2 percent of the loan amount up to
HUD guidelines require that all HECM mortgages be insured. For a standard HECM mortgage, the initial mortgage insurance premium cost is 2 percent of the appraised home value (with a cap of
The third type of expense is closing costs. These include appraisals, title search, inspections, surveys and so forth. These costs may vary, so you should compare costs among lenders.
Like conventional mortgages, reverse mortgages can have either a fixed or an adjustable interest rate. The disadvantage of the fixed-rate mortgage is that you must take all of the proceeds in one lump sum, and interest accrues immediately. An adjustable-rate mortgage (ARM) provides more flexibility because you can access multiple lump sums, regular multiple payments or a credit line. However, ARMs have two significant disadvantages: First, future interest rates are unknown, and they can change monthly and possibly increase to several percentage points higher than the initial rate. Secondly, with a reverse ARM the initial mortgage insurance premium cost is based on the appraised home value regardless of the original loan amount, and interest will accrue on that amount, even if the initial amount borrowed is a small percentage of the home value.
Below I give an example of typical start-up costs for either a fixed or adjustable-rate HECM mortgage. The home value is appraised at
Mortgage insurance premium:
Closing fees (estimate):
Proceeds after fees:
As you can see, there is a significant advantage to the HECM Saver program, especially when there is a high appraised value. The Saver program is preferable except when you cannot borrow enough for your needs.
Many experts discourage borrowers from reverse mortgages, especially the HECM Standard loan, because of the high up-front fees, the uncertainty regarding interest (for ARMs), and loans' inflexibility. Anyone considering a reverse mortgage should consider other alternatives such as downsizing, or selling their home and renting, or using a home equity loan, if they qualify. You can obtain a home equity loan with no front-end costs, but you will have to make some payments.
An excellent source is "The Complete Guide to Reverse Mortgages," by
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